Monthly Archives: May 2013

Stockholders Equity Definition

Stockholders Equity Definition

A statement of stockholders equity guides the reader about the transactions including cash receipt (from issuance of share) and payment (for dividend payment), made by the company owners and the rest of stockholders during the year. Shareholders or equity investors are the owners of the company. Stockholders affect some major decision of the company, including appointing a C.E.O., electing Managing Director etc. To elaborate more on stockholders equity definition consider below points.

Definition of Equity

Equity is an investment made by the external investors in the company. Investors are recognized with various names, like Stockholders, shareholders, owners etc. Generally, they receive two kinds of benefits from the company – one is dividend and the other one is capital gain. If the company makes profit during the year, it pays dividend. And if the value of investment or share price increases, stockholders get capital gain as well.  Let’s take an example; stockholder ‘A’ invests $1000 in the equity of a company. And he gets $100 dividend and $250 increase in the price of the share at the end of the year – in that case, the total benefit of ‘A’ is $350 during the year.

Statement of Equity

It is required to prepare four financial statements (statement of profit & loss, balance sheet, cash flows and statement of stockholders’ equity) by every company as per Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). statement of stockholders’ equity represents the common stock, preference stock, paid-in-capital, reserves & surplus, unrealized gain & loss on long term investment and adjustments for foreign currency transaction.

Importance

Statement of Stockholders’ Equity provides a pivotal part of financial information of an organization. Top level management constantly reviews two points in it – (1) Foreign currency translation adjustments and (2) Unrealized gain & loss on tong term investments. After reviewing the foreign currency translation adjustments stockholders can judge the currency risk for the company. As for unrealized gain & loss on tong term investments, they can identify the fluctuations in the long term investment such as investments on stock & bonds, which is subjected to changes. This unrealized loss will be actual loss only when the investment is sold out.

Time Frame

One most important point in statement of stockholder equity is time of recording of transactions related to equity. For example, if a company issues common stock, accountant will debit the cash & credit the common stock. Thereafter company will pay the proposed dividend when the time comes. After this step, accountant will credit the cash & debit the dividend payable.

Common, Preferred and Treasury Stock

In statement of stockholders’ equity, three types of shares are presented – common, preferred and treasury. Common stocks are the shares of ordinary type and shareholders of common stock hold the voting right in the company. Preferred stocks are the shares having preference in dividend payment compared to common shares but without voting right. Preference share could be of various types, e.g. convertible preferred stock, non-convertible preferred stock, redeemable, non- redeemable, accumulated, non-accumulated, different rate of dividend etc. Treasury stocks are the common shares repurchased by the company.

Conclusion

In short stockholders equity definition is ”Statement of stockholders equity guides the reader about the transactions of company related with owners of the company”

The Unwritten Rules Of Investment

Do you want to make a wise decision in financial investment? If you want to do that then you will have to keep certain unwritten rules of investment in mind. You invest money because you want to secure your life & the generations to come. When you invest, your savings will increase and it will build a capital – with that, economy also will get benefited both locally & globally. There are several schools of thoughts on financial investing. Here are some common unwritten rules of investment. Most of the time, these are proven right. It doesn’t matter what investing strategy you have made. So let’s take a look at the unwritten rules of investment.

No Place for Emotional Decision

It is a human tendency to buy the shares of a company just because they have a personal attachment or liking for that company. This emotional attachment is the result of attachment towards their product. As a result that becomes one of the biggest mistakes while making investment decision. When emotions are involved, logical investing has to make an exit. When emotions are involved, people neglect factors like future growth, market segment & management body concerning that company. It’s very important to evaluate these factors before making an investment. Otherwise you might lose money in future. So emotion should never come in your mind while making a decision on financial investment.

Importance of Historical Trends

Financial market is having a cyclical trend, and this must be recognized by the investor.No doubt, there is no one who can predict the future; however, if you give a little attention on market’s historical trends you will be able to make good decision as compared to others who didn’t perform historical trends analysis.

Be Objective

Never deviate from your investment decision until you get accurate data and information about the market & investment. Never mind people who always pass comments about the state of market. Keep yourself updated about the new investment opportunities. Don’t get carried away by your initial judgment on the information you receive. At the end, financial investment decision should always be taken on the basis of educated opinion.

Information Research

Having lots of information is only going to help you to make a better decision, so you should acquire as much as information as possible about the market before investing. Information is the only key to making a wise investment decision. Investor must grab the information on global market, company’s historical trend, company’s financial decision and policies of the countries.  It has become very easy to get information about historical data of any company, global market etc. through internet. You must do research to find out more about the market & latest trends. And the level of research will decide the success or failure of investment decision.

Diversification

Investing all your money in one investment option will be a foolish decision in today’s scenario. Since different markets in the world are connected somehow, ups & downs are also dependent on the individual markets.  However, the fact remains that no one has been 100% accurate about the market in their prediction. So it’s better to limit the potential losses of the investment by investing in different markets. Diversified portfolio is the common tool used to avoid potential losses. You can invest in other options, for instance real estate, Gold, Debt etc. Hedging of financial instruments is the most common thing done by importers & exporters.

The aforementioned rules are the main unwritten rules of Investment.

Difference Between Debt Investment And Equity Investment

When we think about investment, there is always doubt. What is the difference between debt investment and equity investment? Let’s learn more about it. What does investor get from both? Debt investment investors receive interest with principal amount at the end of the period. However, they are having no control on ownership. In case of Equity investment, Investors are the owner of the company & they hold control on ownership.

About Payment

Debt Investors get interest payment and principal repayment at the end of the term as per the terms & condition of the agreement. But equity investors only get dividend, if it is issued.

Gains

Interest payment is the only gain on debt investment. Equity investors gain from increase of market value of shares. When company makes profit from business, market value of shares increases.

Control

Debt investment gives no control on company’s decision making. Equity investors are the owners of Company. They hold control on the company, as per their percentage of share.

What Is A Monopoly?

Anybody having played Monopoly, a highly admired board game, would know what monopoly means. In that game, players aim to acquire all the properties in the same color. In economic terminology, it represents having monopoly over properties of a specific color. On acquiring monopoly of specific kind of properties you can increase their rentals.

Monopoly in market means when there is just one manufacturer or seller for a product. Monopolist is frequently used to refer to that lone manufacturer or seller.

Monopolies occur when other companies or manufacturers are barred from coming to market to create competition for the monopolist. There are many ways to bar entry of new or additional players. Consequently, there can be many reasons for monopolies to occur.

Possession of an Input Resource

One reason that cause monopoly is a firm’s total control over the raw material necessarily required for producing a particular product. For instance, the sole mud considered good enough for roughing of baseballs used in key league plays is derived from an exacting location along the river Delaware. Now, that location is known to only one family, which owns this business.

Government Franchise

At times, the government itself may create monopolies by granting exclusive rights to a product or service. For example, the US Postal service the lone company certified to carry delivery of residential non-rush letters. Another example is that of Amtrak, founded in 1971. The company was accorded monopoly of providing passenger train services in the US, as a result of which other another company willing to offer similar services is necessarily required to seek consent or cooperation of Amtrak.

Protection of Intellectual Property

Monopolies may arise even when the government unambiguously gives a lone company the rights to provide specific types of patents and copyrights. In simple words, copyrights and patents grant exclusive rights to the possessor of intellectual property that they are the only providers for a novel product for a predefined amount of time, thus creating short term monopolies for novel products or services. The underlying principle at the back of such rights is to motivate the companies to carry out research and development, necessarily required for creating new products or services. If it were not so, no company would be keen to carry on with research of innovative products or services and each would keep waiting for another company to take the initiative and that may never happen.

Natural Monopoly

Sometimes, monopolies may take place when it is not economically viable to have more than one firm for producing the same product or offering the same kind of services. Firms with almost unlimited economies of scales are called natural monopolies. The good produced by such companies are called ‘club goods.’  These companies attain the status of monopoly as the size of their operations is so large that no new company would find it a viable preposition to enter that field and offer products at lower prices. Generally, natural monopolies occur in case of industries having high capital investment and low operational expenses.

Nevertheless, there is always an element of ambiguity when the market defines if a firm is monopolistic. For instance, Ford undoubtedly has monopoly for Ford Focus but not on cars as a whole.

Disadvantages Of An Economic Monopoly

Disadvantages of an Economics Monopoly

It is not unusual coming across a company wishing to beat or even get rid of its competitors. This can be achieved by getting hold of contending companies or by obtaining most of market share. However, this can happen only if the company can successfully monopolize the market. In effect it means consumers would have no choice other than this company for a particular product or even services. Allowing an industry or a marketing company to have monopoly is not healthy for consumers.

Background: Definition

A monopoly is said to occur when we have only one manufacturing or marketing company to depend upon for buying a particular product or services. This is possible when there is only one company qualified enough to produce that product or it has a total control over supply of a product. You would know only Apple has rights for the extensively used iPhone, yet it is competing against other companies producing Smartphone.

Below are some disadvantages of monopoly:

1st Disadvantages of Monopoly – Lower quality at higher prices

Companies having monopoly over a product are bound to take advantage of the fact that the consumers have no other choice but to buy that company’s product. So, the company dictates its prices and terms of business. This not only harms the consumers but also the quality of the product produced by the company. Since there is no competitor, the company hardly makes any effort to improve the quality of their product. It just continues to maintain the lowest acceptable level of safety and quality.

2nd Disadvantages of Monopoly – Consumer bullying

Monopolistic environs, particularly in case of consumable products adversely affect the consumers, having no choice but to buy the one and only product available in the market.  For instance, means of public transportation in a city will be thoroughly analyzed and examined if the government were to raise its fairs. The consumers may not be prepared to pay higher fares, but they are compulsorily made to pay enhanced fares for attending to their jobs. The United States government is particularly careful in ensuring that customers are not subjected to buy under compulsion. In fact, the US has imposed efficient monopoly policies to regulate the prices of goods and services, including utility companies that need to have transparency in their dealings.

3rd Disadvantages of Monopoly – Workers Livelihood

Workers employed by a company having monopolistic business are also adversely affected. Such companies are generally in complete charge of their manufacturing costs, including workers’ wages. That is because there is no other company which could utilize their special skills. As a result they get caught working for the same company. Having realized their status, the monopoly company takes advantage of the circumstances and offers them little or no incentives to enhance their skills. Though employees may form unions to get some level of fairness from the company, it is not really effective in case of unskilled employees.

Credit Default Swap Ratio

Credit Default Swap Ratio

Having an understanding of credit default swaps could be difficult. We can say credit default swaps are comparable to insurance. However, these are not under the control of any government agency such as Securities and Exchange Commission. Many consider credit default swaps to be the basic reason for the crash of housing market during 2008-2009. A credit default swap is most likely when the level of exposure to fiscal risk is more than the funds available for paying creditors. 

Credit Default Swaps
As per their their usual ways of conducting businesses, companies get large chunks of comparable investments like real estate mortgages. With the intention of reducing their risk in case of sizeable number of mortgagees failing to make payments, these companies buy credit default swaps, thus transferring some component of risk to third party. Generally, such bodies are groups of big institutional investors like investment banks, hedge funds, wealthy individuals or families and rich corporations with surplus cash. Mortgage companies utilize credit default swaps to transfer their risks to such institutional investors by paying them a premium. In case of the real default exceeding the predefined limits, the institutional investors have to make payment to the mortgage company as per the agreement made by them.

Credit Default Swap Leverage Ratio

This is the ratio of the full amount of the financial liability exposure divided by the full amount of invested capital. Financial liabilities comprise of the grouping of worth of stocks, financial instruments like bonds, rates of interest and the volume of credit offered to borrowers. The full amount of invested capital is the market worth of stocks and bonds possessed by the borrower. For instance, when a borrower has stocks worth $2 million, a brokerage company could lend $6 million to the borrower, utilizing stocks worth $2 million as collateral. That way, the borrower gets $8 million for executing securities trades, thus increasing the returns that the borrower may earn as also losses that he can maintain. 

Associated risks of credit default swaps

There are many risks connected with credit default swaps. During the financial disaster of 2007-2009, it was realized that many issuers of credit default swaps did not keep adequate reserves with them for making payments as per the conditions of the contracts at the time the mortgages possessed by real estate banks started collapsing. Issuers of credit default swaps are exposed to the risk of increased rates of interest, liquidity of bonds and stocks, natural disasters and revised policies of the government. Other risks may also include option spreads, duration of bonds and beta. 

Another Credit default swap ratio

Credit swap ratios are calculated in different ways, as per the kind of associated risk and detailed understanding of the risk connected to investment. A substitute for the basic credit default swap ratio comes by way of net leverage ratio that takes consideration of the net disparity between the negative and positive exposure to risk. For instance, on employing the basic credit default swap ratio, a group of bonds and stocks may be five investments with a positive ration of five and another five investments may have negative ratio of minus four. So, on the whole, the net leverage ratio should be +1. 

Interest Rate Swap & Credit Default Swaps – Differences!

Credit default swaps and interest rate swaps are fiscal derivatives. A fiscal derivative is an agreement among two or additional parties wherein they give their consent to give each other a definite sum of money as per the worth of an asset, which could be a bond, stock or some other security. The amount of cash to be paid and which of the parties would pay is decided by how the worth of the asset varies with time.

Interest Rate Swaps

The simplest kind of interest rate swap comprises of an agreement between two parties, with one party agreeing to make regular payments to the other party. These payments are derived from payment of interest collected form an asset capable of generating interest. A bond would be an example of such an asset. The date for making payment is usually the same as the date of receiving interest on payment. Since the rate of interest on assets keeps fluctuating all the time, one of the parties may have to make more payment than the other or it could be the other way round.

Credit Default Swaps

In case of a credit default swap, one of the parties concurs to give a series of projected payments in cash to the other party. As barter, the other party concurs to give the first party a definite quantity of money in case the worth of an elected asset, like a bond, capable of giving interest, has had a steep fall. For instance, if there is a default by the bond issuing authority, a person who bought a credit default swap, connected to that particular bond, will be entitled to get paid from the party that sold him the swap. 

Purpose

The idea at the back of designing credit default swaps and interest swaps is to provide some protection against the fluctuations that the value of the asset may face. These are comparable to insurance. In case of an interest rate swap, the lender or the borrower is seeking hedge against an unexpected change in the rate of interest, which might amount to his losing a lot of money. In case of a credit default swap, the buyer of the swap is buying compensation, should the issuer of the asset (which he already possesses) capable of generating interest fail to pay. 

Additional differences:

Usually, interest rate swaps are attached to the changes in the two rates of interest. As per the changes occurring in the rates of interest, it may become necessary for one party to make payment to the other party. At the same time, as a result of the changed rate of interest, it would become essential for the second party to make payment to the first party. On the other hand, credit default swaps are usually attached to the worth of one asset only.

The History of the Credit Default Swap

Credit default swaps first appeared in the market past 2003 and emerged among the most well known financial instruments. Hullabaloo started during the financial disaster of 2007-2010 as AIG along with Lehman Brothers, the two major financial institutions, collapsed because they had invested heavily in credit default swaps.
Beginning
As 1990 was nearing its end, credit default swaps were designed with the purpose of shifting risk, to which commercial banks were exposed for providing loans, to intermediary investors. These intermediaries were gaming that every loan would get defaulted because of which the banks and financial institutions would have additional capital. By the year 2000, the volume of CDS market stood at nearly one trillion dollars.
Description
On entering into a credit swap accord, the purchaser offering ‘protection’ provides a string of funds to the seller. Should there be any default, repudiation or debt reconstruction, the purchaser collects a hefty payoff. Being financial instruments, the rules and regulations, as applicable in case of insurance companies, would not be valid for credit default swaps. Every swap needs conformity to rules framed by the International Swaps and Derivatives Association (ISDA).
Growth of CDS
The market for CDS experienced an exponential growth all through the first ten years of the current century. Trading of credit default swaps become very extensive, because of which uncertainly about the worth went high. Moreover, as none of the parties had provided funds against the original loan, level of speculation in the market went up. More than ten to fifteen parties could be implicated for trading of one CDS.
Disaster
By 2007, the gap between structured and bond investments (25 trillion dollars) and CDS market (45 trillion dollars) reached the level of twenty trillion dollars. By the year end, the size of speculative ‘bubble’ had grown to 62 trillion dollars. Moreover, that very year was faced with the calamity of sub-prime mortgages, as a result of which the doubt about the evaluation of lending institutions and banks increased further. The market got knocked down to 38 trillion dollars in 2008. AIG and Lehman Brothers failed to pay, mainly because they had invested heavily in CDS.
Subsequent to the crisis
Following the financial disaster of 2008, it was realized that the CDS market, due its inadequate transparency coupled with its related connections could make an independent business like Lehman Brothers cause bigger financial collapse. Because of its complete exposure to risk and its size along with the absence of adequate laws, CDS market poses an exceptional danger to the firmness of financial system. The Trade Information Warehouse of the Depository Trust & Clearing Corporation (DTCC), in 2010, decided to allow the regulators an entrée to their registry of CDS.

Credit Default Swap Agreement

CDS is the abbreviated form of Credit Default Swap contract. The contract gains its worth due performance and the quality of credit of a given asset. The contract refers to an accord between a seller and a buyer that ensures getting back the asset, should there be any default. So, CDS is a sort of insurance for a debt.
The basic information
A seller and a buyer can make a credit default swap in private market. The party selling the CDS ensures getting back a specified security, should it default. The party buying the CDS pays the seller till the expiry of the security or its default. Bond markets frequently make use of CDS. These pledge the arrears of a specified firm or securities with government backing.
The objective
The idea at the back of designing credit default swaps was to provide hedge to the risk associated with accepting debt securities. It means that one could buy a bond and purchase also a corresponding CDS, should the borrower turn defaulter and be unable to pay. Of course, it reduces the return you get as you need to pay the seller of that CDS, but it significantly reduces your risk. Financial experts are of the view that CDS lowers the expense of borrowing since it enables the lender to circumvent their bet without asking for increased payment towards interest.
The Sellers
The one selling CDS is exposed to long term risk posed by the borrower. That means the one selling the CDS continues to expect that the party issuing the debt won’t default. In exchange, the selling party makes money from the payment it receives for offering this kind of insurance. Those selling CDSs need to have sufficient funds in more than a few defaults take place so as to avoid getting into trouble.
Naked Purchases
A naked purchase is one that involves buying of CDS minus the possession of essential security. Acceptance of naked bets is a vital matter in CDS market as such bets point out your speculative attitude towards the company. It is no more treated as hedging. It is tilted towards forecasting failure of the company to pay back its debts. Adversaries claim that speculators manipulate to bring down the value of debt and that raises the cost at which the company may borrow and thus cause financial harm to the company. Advocates of naked purchases claim that speculators, being smart in handling such money matters, keep the markets very competent.
Implications
Credit default swaps had a role to play in the monetary disaster that started in 2008. A number of insurance companies and banks like AIG sold substantial amounts of CDS. As firms like Lehman Brothers began failing, institutions like AIG, among others did not have adequate funds for paying every CDS, which they had guaranteed. It won’t be wrong to say that CDSs alone caused the down fall of AIG. Nevertheless, unlike other monetary instruments, CDS market continues with its business and plays an important role in shaping global economy.

The Best Private Loans for Students

Education is becoming increasingly expensive, making it quite difficult for a lot of students to have funds for joining colleges. Students who are not eligible for financial assistance need not feel disheartened as they get many options for borrowing money from banks and companies. Since credit unions and banks offering private loans to students are not financed by governments, they provide loans on their terms and rates of interest. Student would benefit by conducting their own survey of lenders, each having its own terms of loan and chargeable rate of interest.

Student Loans from Sallie Mae

Sallie Mae is among the biggest providers of student loans for college as well graduate and professional schools. Student may pay back the loan and interest while still at school. They also get the option of paying back loans through fixed monthly installments. The bank assists students to know and assess the expense of their education, allowing them to identify their most suitable option.

Student Loans from Chase Bank

Students can also avail of private loans for continuing their college or graduation program. Since the bank provides funds directly, no federal assistance is offered. Terms of private loans from banks vary with the bank and are quite different than federal assistance. Chase offers loans as per the creditworthiness of the student. Students who can get a co-signer having good credit score are quite likely to get loan at lower rates of interest. The extent of loan extended by Chase and the rate of interest to be charged is decided by the credit score of both the parties.

Citibank Offers Private Student Loans

Citibank comes to the help of students seeking loan by offering a list of lenders from its database, thus giving them a choice of selecting a lender that best suits their requirements. The bank also assists students in identifying their best option. Private loans for students of colleges or graduate schools are offered in varying amounts and rates of interest. The terms for paying back the loan would vary with the duration of the study program chosen by the student.

More private loans

There is no dearth of lenders, including banks, offering loans to students keen to go to college or undertake graduate studies. However, students should exercise caution, especially when dealing with not so well known lenders. The maximum amount offered as loan and its terns of repayment varies with lenders. The borrower should thoroughly understand the terms of loan including the amount offered, rate of interest to be paid, conditions of repayment and options of postponing the loan paybacks.  Any good lender should answer these questions as these form a part of customer service. And finally, don’t hesitate to request for discounts.